Monday, July 27, 2009

Never Throw Good Money after Bad

I have learned so much from talking to people who can't pay their mortgage. They are afraid they will lose their home. They are concerned about their kids, their family, their stability. On top of that they usually have high credit card debt. Most of all, they take it personally and feel like they failed. They feel like they're not in control because of tight finances.

I always say "I've been there, we've all been their, you are not alone. You will get past this"

It is important to empathize with people and respect their feelings about their situation. Each persons' circumstance and their reaction to it are unique.

YET, how the problem is resolved is ALWAYS THE SAME.

Don't Throw Good Money After Bad!Don't Throw Good Money After Bad!Don't Throw Good Money After Bad!

Hmmm...Let me see...what's Good money after Bad.

Well, if the mortgage balance is higher than the value of the property (aka being Upside Down) or if you are spending most of your income on mortgage payments or if you neglect to pay other expenses or if you are draining your savings or retirement money...basically anything that is better investment than your mortgage payment, then making mortgage payments is throwing good money after bad. What's the primary reason to own a home. At the end of the day it's about wealth preservation and creation. Everyone buys a home in hopes that it will increase in value over time, this way we can get a return on thousands of dollars in mortgage payments, years of repairs, upgrades, taxes, insurance, and utility payments. A piece of your estate that can be passed on to your children.

THIS TIME THINGS ARE DIFFERENT. You cannot rely on the old saying "the real estate market will bounce back and prices will return". While it's true real estate markets move up and down, there is no way property prices will return to the levels we saw from 2004 to 2007. No way. This means if anyone purchased a property during 2004 to 2007, it is likely the purchase price was at the peak of the market. This scenario is not limited to purchases. Many people refinanced at the peak of the market because..well...that was the time to extract tens of thousands of dollars from a home. It was when anyone with a good credit score and a warm body could get $100,000.

Well, Peak No More. The gold rush is a bust. Everything was built on inflated appraisals and of course, greed. TheKoolAde went empty and the Band Aid became necessary. Most properties will continue to decline. It isestimated that by 2011, almost half of all mortgages will be "underwater". So don't be fooled if you hear the real estate market is getting better. It's better for people looking to buy foreclosures and cheap houses since there is a glut of property and everything is cheap.

So for those of us who took out mortgages at(whether to buy or refinance) 90% to 100% financing, option arm, adjustable, or even fixed rate, repeat after me..."My property value will never be what I(purchased or refinanced) for, and it is likely I will not have any equity.

What about credit cards with interest rates of 16%, 17%, 18%, 24%, even 30%? What about the new fees, such as membership fees and other hidden fees? Does it make sense to make these payments? Are you throwing good money after bad? Ask yourself, even with good credit, what are the chances you can get another credit card with a lower interest rate? Or ask, How come the credit card company won't lower my interest rate even though I have good credit?

So repeat after me..."I will never payoff my credit card unless the credit card company lowers my interest rate to 5% and reduces my principle".

So repeat after me..."It's so obvious the banks are doing anything they can to get cash from cash strapped consumers. Why am I surprised, it's a bank, no one owes me any favors"

There is this moral issue about being responsible for a debt after you agreed to take it on. In fact, it is a question of integrity. Essentially, once we sign on the dotted line we must stick to the deal under all circumstances.

Ask yourself, is it fair for the government, big banks, big businesses, and other power players to get a bailout. Why can't you use the same techniques banks use when they are in trouble - DEBT FORGIVENESS, LOW INTEREST LOANS, STOP MAKING LOAN PAYMENTS, TAXPAYER FUNDED GOVERNMENT BAILOUTS, in effect, A bank does not throw good money after bad.

It is your duty to protect the financial well being of yourself and your family. You do not have a moral obligation to pay a bank anything. Your obligation is only legal. It is not a crime to put your money to best use.